OPEC likely to extend output cuts, but price relief elusive

However, if the drawdown does affect prices, "it's going to be US prices that will be impacted", said Sandy Fielden, Director of Research, Energy and Commodities. On Thursday the Organization of the Petroleum Exporting Countries (OPEC) meets in Vienna to consider whether to prolong cuts to reduce a global glut of crude.

Earlier in the session oil prices dropped on the White House plan to sell off half of the nation's 688 million-barrel oil stockpile from 2018 to 2027 aims to raise $16.5 billion and help balance the budget. Just look at what happened three years ago, when decisions to increase production led to the price of oil falling down an elevator shaft from a high of around US$115 per barrel of crude in June 2014, to about US$27 in January 2016.

OPEC rhetoric will continue to be monitored closely overnight and ahead of Thursday's meeting.

OPEC and its allies came one step closer to agreeing to extend their oil supply deal after a ministerial committee recommended another nine months of cuts.

Until now Saudi Arabia were living in denial, stating they expected no USA shale oil response in 2017. Shortly afterwards, Iran's oil minister indicated his support for a nine-month cut.

Deutsche Bank said the market had priced in a nine-month extension. For six months or longer.

Citi's analysts believe a six-month extension would be sufficient to tighten oil supplies significantly.

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But that price factors in the market's expectations of what will emerge from this week's discussion. "It would appear that a six-month extension would be a backtracking of sorts". Both have regained some volumes in recent months and are expected to add more soon, adding to OPEC's challenge in rebalancing the market. The third-largest non-OPEC participant in the agreement pumped 1.76 million barrels a day in April, overshooting its target of 1.68 million, OPEC estimates show. This is because of the massive growth of the shale oil industry, significant technological improvements in drilling technology, and the growing efficiency of energy companies.

A release of US strategic reserves could jolt an already imbalanced oil market and undermine attempts by the Organization of the Petroleum Exporting Countries and other producers, including Russian Federation, to end a persistent supply glut.

"When you have backwardation, it tells you to drain your tanks and produce more in order to monetise your production and reserves".

He said he saw inventories declining to their five-year average by the end of 2017. The joint efforts of the OPEC cartel with non-OPEC producers dating back to October 2016 initially resulted to a curb of almost 1.8 million in the first month.

The US government poses another risk to OPEC's attempts to erode oil stockpiles.

President Donald Trump's proposal to sell half of the US strategic oil reserve highlights a decline in the biggest oil user's reliance on imports - and a weaning off OPEC crude - as its domestic production soars.

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